Are Palestinian Offensives Inviting Israeli Reprisals?

Until recently, PA Finance Minister Shukri Bishara (left) was one of the few Palestinian officials always happy to see his Israeli counterpart. That will likely change.

In response to Palestinian Authority [PA] President Mahmoud Abbas's latest diplomatic offensive at the United Nations and the International Criminal Court [ICC], Israel's security cabinet is to meet this week to decide on possible measures to take.

Israel has floated a number of possible countermeasures. It seems to be considering, among other legal actions, lawsuits against Hamas and the PA for war crimes that they have committed.

The United States, for its part, has threatened to withhold funding from the PA; and Senator Lindsay Graham (R-SC) threatened to withhold US funding from the UN if it attempts to impose the terms of a Palestinian statehood.

Israel's Foreign Ministry Director-General Nissim Ben-Sheetrit stated on January 4, 2015 that, "Israel is about to switch from defense to attack mode." He added that Israel had no interest in undermining security cooperation with the PA or causing it to collapse, or in launching a wave of settlement construction. He did, however, mention possible economic actions stronger than freezing Palestinian tax revenues.

In this game of asymmetric diplomatic warfare, the Palestinians can count on nearly automatic support from the 22 members of the Arab League and the 57 members of the Organization of the Islamic Conference, as well as most of the rest of the developing nations, while the Jewish state is nearly alone.

The balance of power in the United States Congress, however, goes the other way. Thanks to strong public support for Israel, friends of Israel constitute a clear bipartisan majority in both the House of Representatives and the Senate. The Palestinian campaign at the U.N. could trigger a cutoff of U.S. aid to the PA of $400 million per year.

To counter the Palestinians' recent diplomatic offenses, Israel has at its disposal, apart from diplomatic or legal measures, an array of economic responses, should it feel driven to use them. Prime Minister Binyamin Netanyahu said on April 6, "Unilateral actions from the Palestinians will be answered with unilateral actions from our side." That economic impact to the PA could be many times greater than a U.S. cutoff of aid.

Clearance Transfers and PA Revenue

To begin with, if it wished, Israel has the ability to withhold "Clearance Transfers." These consist of more than two-thirds of PA revenues.

Under the 1994 Paris Protocol, adopted as one of the Oslo Accords, Israel collects customs taxes on goods shipped to the Palestinian areas, the Value Added Tax [VAT] for goods and services sold in Israel and intended for PA consumption, and petroleum excises, as well as small amounts of income tax from PA residents working in Israel. Under the agreement, these clearance revenues are transferred monthly directly from Israel to the PA Finance Ministry, and are the PA's largest source of funds.

Israeli Clearance Transfers Are 2/3 of PA Revenues(millions of shekels)

In normal times, the government of Israel works to increase these clearance transfers to stimulate the Palestinian economy, not to reduce them. On July 31, 2012, Israel agreed to expanded arrangements regarding taxation and the transfer of goods between Israel and the PA, for the purpose of increasing the PA's revenue. Prime Minister Benjamin Netanyahu said, "The arrangements that have been formulated constitute part of our declared policy of supporting Palestinian society and strengthening its economy."

PA Prime Minister Salam Fayyad responded, "I am certain that the arrangements concluded will help to strengthen the economic base of the Palestinian Authority... I am pleased to say that these arrangements will also improve the economic relations between the Palestinian Authority and Israel. I wish to convey my appreciation and gratitude to Israeli Prime Minister Netanyahu..."

The PA Prime Minister who uttered those words, however, was dismissed by PA President Mahmoud Abbas less than a year later, as part of Abbas' shift to a more confrontational strategy. Today, the PA is on the path to confrontation, not cooperation.

Israel is not willing to have a one-sided relationship in which it tries to help the PA while the PA crusades against Israel at the U.N. and allies with Hamas to harm Israel. While it does not wish to harm the Palestinian economy, on eight occasions since 1994, Israel has suspended transfers of clearance revenues in response to Palestinian threats:

Summer of 1997, in response to a rise in terrorist activity in the West Bank and Gaza.

December 2000 to December 2002, in response to the outbreak of the second intifada in September 2000.

March 2006 to July 2007, when Hamas's victory in Palestinian legislative elections gave it control of the Palestinian Authority.

2008, to protest Palestinian diplomatic efforts to turn European governments against Israel at the Organization for Economic Co-operation and Development.

May 2011, in response to Palestinian efforts to seek diplomatic recognition at the U.N.

December 2012 to January 2013, in response the PA's successful bid for nonmember observer status at the U.N.

April 10, 2014, in response to PA applications to join U.N. agencies as a state.

On January 2, 2015, the government of Israel decided once again to withhold the December 2014 clearance transfer of $127 million, in response to the PA's hostile activity at the International Criminal Court.

In recent years, Arab banks have been less willing to increase their exposure for the purpose of paying salaries. International bailouts from donor governments have also become more difficult to obtain.

In some of the earlier incidents, the impact on the PA was ameliorated by bridge loans from Arab banks and international donors, as described in an International Monetary Fund study of Israeli clearance transfers. In recent years, however, Arab banks have been less willing to increase their exposure for the purpose of paying Palestinian salaries. International bailouts from donor governments have also become more difficult to obtain. Without bridge loans and emergency aid, the PA has been forced to suspend salary payments to many of its 150,000 employees, leading some of those workers to default on their own debt obligations. The PA even had to sell some government assets to meet payment obligations.

Israel's direct leverage through clearance transfers has grown considerably in recent years, particularly compared to budget aid provided to the PA by international donors. Until 2009, donor support exceeded the Israeli clearance transfers, but in more recent years Israeli transfers amount to nearly twice the budget support the PA receives from international donors. In 2014, U.S. direct aid to the PA was $400 million, and other donors gave another $900 million. But Israel clearance transfers were $1.8 billion, giving it a greater role than all other outside parties.

Israeli Clearance Transfers Are Larger than Foreign Aid to the Palestinian AuthorityMillions of shekels

Palestinian Guest Workers in Israel

Another potential pressure point under Israeli control is the number of citizens of the PA permitted to work in Israel and the settlements. In normal times, Israel welcomes Palestinian workers. But in periods of conflict and confrontation, into which Mahmoud Abbas is now headed, the entry of Palestinian workers may need to be restricted for security reasons.

Between a fifth and a third of West Bank Palestinian employment is in Israel. Average wages for Palestinian workers in Israel are double those in the West Bank and triple those in Gaza, according to the Palestinian Ministry of Finance. Remittances from these workers back to the PA economy play a key role in offsetting the imbalance of external trade in goods and services. The impact on the Palestinian economy comprises about 15% of the PA's GDP.

Palestinian workers contribute to the Israeli economy too. But there are security risks for Israel in admitting large numbers in times of tension. At the height of the Camp David peace negotiations, the number of Palestinians working in Israel and the settlements reached a high of 127,000, but during the Second Intifada, which began in late September 2000 and ended around 2005, restrictions cut that number by more than 60%. In June of 2004, as part of then Prime Minister Ariel Sharon's disengagement plan, the Israeli government decided "to reduce the number of Palestinian workers entering Israel, to the point that it ceases completely."

However, since 2005, contrary to that decision, the government of Israel has permitted the number of Palestinians working in Israel and the settlements to rise more again more than 100%, back over 100,000.

Israel can also influence the PA through import and export controls. In 2013, 87.9% of total PA exports and 63.9% of total imports were to or from Israel, according to the Palestinian Ministry of Finance.

Constraints on Israeli Leverage

Israel's economy, with a 2014 GDP of nearly $300 billion, dwarfs its Palestinian neighbor, whose GDP is estimated at less than $10 billion. This enormous asymmetry gives Israel even more leverage in many areas of Palestinian economic life than the United States and the other international donors to the PA possess.

But Israel also has a stake in the economic success of the PA, as it constantly emphasizes in its annual reports to the Ad Hoc Liaison Committee of foreign donors, boasting of "Measures Taken by Israel in Support of Development of the Palestinian Economy." The Israeli security establishment believes that impeding the Palestinian economy, or undermining the ability of the PA to maintain public services and keep order, is not in Israel's interest. Israel's international allies, especially the United States and the European Union, often urge caution in using Israeli economic pressure against the frail Palestinian economy and government. Israel's Coordinator of Government Activity in the Territories [COGAT], an official of the Ministry of Defense, responsible for maintaining order in the territories, also act as an internal lobby for support to the PA.

There have even been occasions when the government of Israel chose to make accelerated clearance transfer advances to the PA to relieve budgetary distress, in effect lending money to the PA Israel also tolerates some arrearages in Palestinian payments to the government-owned Israel Electric Corporation and the Mekorot Water Company, although it cannot tolerate payment delays that stretch over years.

Economic sanctions against the PA risk undermining stability in the West Bank, and need to be used with great caution. What Israel is trying to achieve is to apply just enough pressure to change the behavior of the PA, but not so much as to bring about its collapse or failure.

Abbas's Threats to Dismantle the PA

PA President Mahmoud Abbas is well aware of Israel's economic leverage. But he seems to believe that he can block the Israeli counterattack with the threat of dismantling the PA and leaving Israel to pick up the pieces. Abbas told Haaretz in December 2012, "I will take the phone and call Netanyahu. I'll tell him, 'my dear friend, Mr. Netanyahu, I am inviting you to the Muqata [the PA presidential headquarters in Ramallah]. Sit in the chair here instead of me, take the keys, and you will be responsible for the Palestinian Authority." In April 2014, Maariv quoted Abbas as threatening to disband the PA. "I don't need Netanyahu. ... Give me a junior [Israeli] officer or even a lieutenant and I will deliver the PA keys to him. Here you are, take charge and I will leave in an hour."

According to a November 2014 report in the newspaper Al-Quds, "President Mahmoud Abbas told the German Foreign Minister: 'Let [the Israelis] take the keys and manage the occupied Palestinian territories'." In response to Israel's January 2015 suspension of clearance transfers, Saeb Erekat, the former chief Palestinian negotiator in the peace negotiations with Israel, told Haaretz, "Let Israel worry about paying the salaries and worry about the daily needs instead of the Palestinian Authority. The time has come for Israel to take responsibility for the occupation."

PA President Mahmoud Abbas is well aware of Israel's economic leverage. But he seems to believe that he can block the Israeli counterattack with the threat of dismantling the PA and leaving Israel to pick up the pieces.

But most of the leading thinkers in Israel do not find these threats to dismantle the PA credible. Collapse of the PA would have drastic effects on Fatah's own core constituency. According to the International Monetary Fund, nearly a quarter of all Palestinians in the West Bank and Gaza are employed in the public sector, including education, health, police, and other sectors. Total public employment (PA and local governments) amounted to about 192,000 in mid-2012. Unemployment in the West Bank is already almost 20%, so half the workforce would be without salaries. Public safety, education, sanitation, medical care, and other services would be severely disrupted.

Collapsing the PA would also undermine Abbas' own core objectives. How could the statehood initiative at the United Nations and the PA's offensive at the International Criminal Court proceed if "Palestine" was without a government? Building a state and removing its government are opposites.

Without a government, how would foreign aid be received? U.S. State Department spokesman Jen Psaki said on April 21, 2014, "That type of extreme step would obviously have grave implications. A great deal of effort has gone into building Palestinian institutions ... and it would certainly not be in the interests of the Palestinian people for all of that to be lost. The United States has put millions of dollars into this effort. It would obviously have very serious implications for our relationship, including our assistance going forward."

Rash action by Abbas would also open doors for his political rivals, who might be very happy to see the PA dismantled. Collapsing the PA would mean an end to security cooperation with Israel -- an act that would be suicide for Fatah. Chaos would open many opportunities for Hamas and other militant Islamic movements, with the PA's security forces in disarray. Mohammed Dahlan and other rivals inside Fatah could move to reconstruct the PA under their leadership.

Restraint by Both Sides

Collapsing the Palestinian Authority is not a rational choice for the Palestinian leadership. Nor is it wise for the PA to provoke Israel. Israel can take measures that will have much more immediate effect than anything the PA can do at the United Nations.

But Israel, too, faces risks in the game of asymmetric political and economic warfare. The rational choice for both parties is to end these tit-for-tat reprisals and return to the pursuit of common interests through cooperation.